Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATEC's third quarter financial results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP, pro forma, or adjusted measures. Reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in today's press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Leading today's call will be ATEX Chairman and CEO Pat Miles and CFO Todd Koenig. Now I will turn the call over to Pat Miles.

Thanks, Regina, and welcome everybody to the Q3 2023 financial results. There is going to be some forward-looking statements, so if you would read that at your leisure, that would be greatly appreciated. And so our spine-focused momentum continues. So revenue for the quarter was $118 million, 32% revenue growth. The surgical revenue growth was also 32%. and a positive adjusted EBITDA of $2 million. So just a few highlights. We achieved 24% volume growth and 6% growth in revenue per procedure, drove $14 million in EOS revenue. That's a growth rate of 30%. Launched Calibrate LTX, an expandable implant for lateral procedures. So nice to be in the disposable game. Delivered second consecutive quarter of positive adjusted EBITDA with 860 basis points of margin expansion. Raised $150 million to accelerate investment in revenue generating assets while executing to profitability and cash flow commitments. And enhanced our board of directors with deep spine prowess. So super excited about adding EBITDA. Keith and Dave to the team from a BOD perspective. So our commitments haven't changed. We're still applying our 100% spine focus, which we think is super important to create clinical distinctions. That means we're going to continue to do better and deeper work. We're going to continue to compel surgeon adoptions. We love to continue to do better, more distinctive work, and clearly the surgeons would apply that to their patients for improved care. And just a great opportunity from a market disruption perspective. So we want to continue to elevate distribution and continue to deliver better solutions. And so I think many see spine as commoditized. And usually when markets are commoditized, the results are predictable. When you think about spine, you see a revision rate in adult deformity of 25%. And in degenerative, a 10% to 15% revision rate. That is not in any way predictable nor commoditized. And so we think that minimizing the clinical variables in spine through proceduralization is a very big part of making something better. And so we design and develop and integrate technology to address the goals of spine surgery, which is decompression, stabilization, alignment. specific to each approach. And so we design the elements to work together for efficiency's sake. And we believe that if money is tokenized time, things like PTP that fulfills the surgical goals in less time with a patient under less anesthesia is value creation immediately. And so when you give surgeons back time and predictability, what you do is you earn their confidence. And so when we earn their confidence, what happens is is they expand ATEC product utilization in more conventional procedures. So you start to see PLF and TLIF and ALIF and ACDF and posterior cervical be utilized in a much more common way. And so we have just really begun our pursuit to increase predictability and reproducibility. And so our commitments to advanced spine surgery are palpable. And so when you start to think about how you do that, we think about informatics, which is a big part of what we're doing, which is standardizing imaging, or really through standardized imaging. Quantifying global alignment, we think, is a great opportunity to create objectivity to the greatest correlative of a long-term outcome. We think we can inform spine surgery much better and much more widely with automated tools. And we'll start seeing that in full release in mid-2024. We're also very excited about valence. which is the navigation robotic system. We're going to integrate it into the workflow of all of our procedures, and that's going to enhance surgical precision while reducing radiation. At NASP this year, we launched Calibrate LTX, so we are expanding the sophistication of our lateral approach with a lateral expandable implant designed to enable precise control of lordosis and disk height restoration. When you start to think about informatics or great influence, we think about EOs, and we think about really what we're doing from a design perspective around catalysts. And it is going to be the most relevant system in spine. And you can see a lot's going on. We've gotten several FDA clearances in automated surgical planning, as well as our patient-specific rods. So congrats to our regulatory team who continues to crush it. But we think that things like knowing before surgery through automated alignment reports and automated 3D models that our ability to start to preoperatively understand what we're going to do in the operating room and then integrate the pre-op elements into the operative experience, again, furthers predictability. And then evaluating that or assessing that against a post-op experience. is really going to change the way that spine surgeons think about preoperative planning and interoperative integration. And so we are off and running. We're going to start to evaluate that stuff late this year and early next and can't be more excited about what's going on with our ecosystem. So it is truly end-to-end. So our ability to understand preoperatively, provide automation to the surgeon, integrate that into the interoperative experience, and then inform what's next with regard to the next preoperative plan. So we feel like that type of distinction continues to compel multifaceted surgeon adoption. And so we had a ton of surgeons through here this quarter. We had greater than 130 trained in Q3 of 23. we continue to earn more of each surgeon's surgeries. And so the surgeon utilization all the way back from 2018 continues to go up and to the right, which we love. And the whole convoy sales in terms of proceduralization continues to march up. And so I think from a demographic perspective, we're totally bullish with regard to what's going on for us in the space. And so We have been one of the fastest growers or the fastest grower, not one of them, the fastest grower. But we always believe that our best is yet to come. And when you start to look at demographically what's going on, we think that not only the stuff where we're driving clinical distinction, but the market dynamics really avails an opportunity that we think is really profoundly unique. And so our opportunity to create distinction within the elements of our distribution is very, very apparent. And so we're going to do two things. We're going to expand our footprint. And the first thing we're going to do is we're going to continue to address the third of geographies that are under-penetrated. We are less than a 5% market shareholder. And so our opportunity is significant to continue to expand our market share. Places where we have distribution and solid distribution, we have approximately 25% share in very focal areas. So we've always talked about us having a focal footprint. Where we have committed, we have grown and we've demanded a significant market share. We believe that we can do that across the country more and more readily. And I think that the environment provides us that opportunity to capitalize on market uncertainties to improve quality and quantity of our funnel, strategically fill gaps, fill in gaps, some major markets still are greenfield opportunities. So we feel great about it. So not only are we going to expand footprint, we're going to increase the contribution of our existing team. If you look at same store sales, they're in the 30% range. So you love the growth profile of the people who have been with us for a while. So we're going to further penetrate adjacent markets within existing territories, advance teams' clinical aptitude, and continue to earn a share of existing surgeon users. The spine industry has served us up a heck of an opportunity, and we are positioned to capitalize on the market disruption. I think those of you who have followed the market since January of 23 have seen disruption with regard to the OrthoFix C-spine assembly, the Globus Nuva assembly, the change in leadership at OrthoFix. We think all of these things are opportunities for us to ultimately capitalize on, and so We've already added 30 professionals, and we will continue to be disruptive as it relates to the expansion of a more informed team. And so we will boldly lean into an unprecedented opportunity. And I wanted to provide a little bit of clarity just in terms of historically how we used to have to compete in more of a conventional market. And it was more of a one-by-one-by-one. It was a very gradual, linear sales talent onboarding. And so... And then it was a linear investment in revenue-generating assets. With this market disruption, we think it served us up really an unbelievable opportunity. And now the opportunity is completely different, and it's nonlinear, both from a talent onboarding perspective as well as an investment profile of revenue-generating assets. So the opportunity is palpable. We cannot be more excited. And with that, I will hand it over to Todd.

Well, thank you, Pat, and good afternoon, everybody. We appreciate you joining us on the call today. So I'll begin with revenue. The third quarter revenue was $118 million, up 32% over the prior year and up 1% compared to the previous quarter. The $118 million in revenue was comprised of $104 million in surgical revenue and $14 million of EOS revenue. Third quarter surgical revenue of $104 million increased 32% compared to the prior year period and was up $1.5 million sequentially with one less selling day compared to Q3 of 2022 and compared to Q2 of 2023. Additionally, the year-over-year growth of 32% is on top of a 53% surgical revenue growth comparison in Q3 of last year. Procedural volume grew 24% in the third quarter, reflecting strong surgeons' adoption, with growth in the number of surgeons utilizing our procedural solutions up 25%. Average revenue per case expanded 6% year over year due to continued mixed benefit from the momentum of our lateral franchise, the continued increase of our biologics attach rate, and an increase in case complexity. Lateral performance continued to be strong and drove increases in both procedural volume and revenue per case. With the recent update to our cervical procedural offering, cervical revenue also contributed significantly to growth. Given cervical cases have lower case ASP than our overall average, This was a slight headwind to growth in revenue per case. EOS revenue in the third quarter was $14 million, up 30% compared to last year, with solid execution on deliveries and installations. Working through the remainder of the P&L, third quarter non-GAAP gross margin was 72%, up 130 basis points compared to the prior year. The year-over-year increase was primarily driven by the EOS gross margin, which is benefiting from strong execution in addressing the backlog of service needs. in addition to the pricing initiatives we put in place. Third quarter non-GAAP R&D was $13 million in approximately 11% of sales, compared to $10 million in 12% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investment in organic innovation, including approximately $1 million of investment associated with Valence, the robotic navigation platform we acquired in April of this year. Non-GAAP SG&A was $80 million and approximately 68% of sales in the third quarter compared to $67 million and 75% of sales in the prior year period. We delivered 680 basis points of improvement year over year. That is noteworthy as we begin to lap the significant leverage gains achieved last year, including SG&A leverage of 860 points in the prior year quarter. The majority of the improvement in the third quarter of 2023 was driven by variable selling expense with a balance driven by infrastructure leverage. and net of about 90 basis points of investment related to continue efforts establishing our international presence. Total non-GAAP operating expense amounted to $94 million and approximately 79% of sales in the third quarter compared to 78 million and 87% of sales in the prior year, demonstrating 730 basis points of operating leverage year over year. Adjusted EBITDA was over $2 million and approximately 2% of sales in the third quarter compared to $6 million loss and negative 7% sales in the prior year period. This represents 860 points of margin expansion and the drop-through of approximately 30% of the year-over-year growth in sales dollars. It is worth noting that it was in Q3 of last year that we began to see significant adjusted EBITDA margin expansion, so this quarter's strong operating performance demonstrates our ability to both sustain and expand on that progress. We are pleased to have achieved the second consecutive quarter of positive adjusted EBITDA, performance that reinforces our confidence in achieving the long-term profitability goals we have committed to. We ended the third quarter with $123 million in cash. That, along with proceeds from our recent secondary offering, positions us with over $260 million on the balance sheet to take full advantage of the opportunities ahead, which I'll cover more in a moment. Operating cash use totaled $37 million, of which approximately 90% was related to investments to support growth, primarily the inventory and instruments that facilitate our growing distribution footprint and new product launches. Adjusted EBITDA improvements are benefiting operating cash use, and we expect that to continue through the balance of this year and into next as we've now inflected to positive adjusted EBITDA. We've shared a chart on the bottom of this slide that demonstrates the percentage of free cash use for inventory and instruments. As we've expanded profit margins, a larger portion of cash use is going toward investment in the revenue-generating assets that support sales growth. The expansion of profit margins will enable us to achieve cash flow break-even on schedule as we communicated in our long-range plan. Debt at carrying value was $523 million, inclusive of a $50 million draw on the Braidwell term loan facility. Now turning our outlook for the full year 2023. We raised 2023 revenue guidance when we pre-announced the third quarter ahead of the NASS conference a few weeks ago. We expect full year 2023 total revenue growth of 35% to approximately $472 million. That includes 2023 surgical revenue growth of approximately 37% to $414 million, and EOS revenue growth of approximately 21% to $58 million. As sales growth drives leverage across our business, we expect to continue to achieve significant adjusted EBITDA progress this year. In conjunction with increased top-line guidance, we are raising full-year adjusted EBITDA guidance to $3 million, representing 860 basis points of margin expansion. The increased guide is in line with a framework we've shared. specifically that we anticipate about 10% of revenue upside relative to previous guidance to flow through to adjusted EBITDA, while the balance will be reinvested to drive long-term top-line growth. The next slide provides additional context for updated 2023 guidance. I'll start by sharing how our expectations for procedural volume and average revenue per surgery growth shape surgical revenue guidance. We continue to train surgeons at a robust rate, which drives both surgeon adoption and utilization. Training surgeons builds loyalty and enables surgeons to work up the procedural complexity curve, both of which increase utilization. And the middle chart is a testament to the consistent ramp in utilization that our surgeon cohorts have demonstrated each year. Due to the strong momentum of these dynamics, we now expect mid-20s percent procedural volume growth for the full year 2023 compared to low-20s volume growth expected previously. Average revenue per surgery grows as our mix shift towards procedures that require more products per surgery, like PTP and LTP, and towards surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The gradual addition of expandable implants to our portfolio and increasing biologic detach rate are also contributing. Strong reception to the upgraded cervical procedure offerings we have introduced over the course of the last year offsets the growth in revenue per surgery to some degree, as cervical cases feature a lower selling price than our other procedures. Collectively, we continue to expect these dynamics to drive growth in average revenue per surgery at a high single-digit percent rate for the full year. With respect to the rest of the P&L, revenue growth has continued to feel not just meaningful operating leverage, but also solid outperformance relative to the profitability commitments we shared as part of our long-range financial plan last May. Guidance for adjusted EBITDA of $3 million for this full year has increased from break-even expectations at the start of the year. And that is net of approximately $4 million related to the valence R&D investment that we added after acquiring the technology in April. The $3 million of adjusted EBITDA implies 860 basis points of improvement and approximately 26% drop through on the year-over-year dollar sales growth. That inflection to positive adjusted EBITDA has made our path to cash flow break even increasingly clear. The components that are delivering leverage have been consistent with what we described in our long-range plan. At that time, we committed to 2,500 basis points of operating leverage, and over the 2021 to 2025 time horizon, and our guidance implies we are about halfway there in 2023. The 2,500 basis points of improvement by 2025 entails about 300 basis points of contribution from R&D margin, about 1,000 basis points related to variable selling rate, and another 1,200 basis points contribution from SG&A infrastructure leverage. The improving variable selling rate and the infrastructure leverage that sales growth has enabled over the last several quarters give us great confidence to continue investing in growth while achieving our profitability commitments. I'll turn next to the secondary offering that closed just over a week ago. Pat walked through where we stand in terms of our U.S. distribution footprint, where roughly one-third of territories, including some of our country's most populated areas, are on or under-covered by ATAC representation. Industry disruption has unlocked an extraordinary opportunity for us to onboard entire teams of highly seasoned sales professionals from disrupted companies. And we expect continued recruitment success. These tenured professionals ramp toward productivity much more quickly than the sales professional new to lateral surgery or new to spine. And we need to fully support their transition to ATEC with sets and inventory they will need to serve their surgeon customers. The $150 million we raised will fund investment in those revenue generating assets, not just for the teams as we onboarding today, but for the teams we expect to bring on over this next year. Armed with this capital, we can lean into the opportunity ahead and sustainably expand market share. I would also like to highlight that the asset investment we are funding have an attractive ROI. $75 million invested in sets and inventory supports $100 million in annual revenues in each of the next five to seven years. That upfront investment generally delivers about $30 million in free cash flow in its first year, followed by about $50 million in free cash flow in each of the following years. Conservatively, assuming the assets are in circulation for five years implies a 3x return on investment. So while growing market share in Spine is capital-intensive, the returns at scale are very strong. I want to be very clear that we remain fully committed to the profitability walk we shared in conjunction with the release of our long-range plan in May of 2022. This year, we have achieved a just-a-dee-ba-da break even ahead of plan and have raised full-year guidance from zero at the start of the year to $3 million today, net of our investment in the Valence Robotic Navigation Platform. Additionally, we've communicated and are operating to a construct that will drop 10% of any revenue outperformance compared to revenue guidance through to adjusted EBITDA. For example, we have increased revenue guidance by $34 million from the start of the year to today, and in conjunction, adjusted EBITDA guidance has increased by $3 million. Net of the investment and valence. We don't expect that to change, and our inflection to profitability will enable us to achieve cash flow breakeven in 2025. I'll provide some additional context that supports why we are confident in achieving our profitability commitments for this most recent capital raise. The previous slide depicted that 1,200 of the 2,500 basis points of operating margin expansion that we committed to has been and will continue to be driven by infrastructure leverage. Increased revenue growth enables us to lever the infrastructure investment made that are facilitating our expansion into a larger spine company. Accelerated revenue growth will fuel faster than expected infrastructure leverage. Another 1,000 basis points of the operating margin expansion that we committed to is from variable cost leverage we have been seeing for the past five quarters now. With respect to our selling organization, we predominantly operate with exclusive sales agencies where the cost profile is variable and contractual over time. Additionally, our long-range plan always assumed we would expand our sales footprint as we grow. Therefore, the investment in distribution expansion was contemplated in our profitability commitments. As we onboard new sales agencies, the related spend is variable and at a rate that contractually works lower over time. We are structuring the new sales contracts like we have always structured sales contracts with a competitive commission rate that supports their transition to ATEC and incents them to grow their business with contractual step-downs on their increasing basis of business over time. In sum, both leveraging the infrastructure and an improving variable selling cost profile will support the profitability improvements we've committed to. That's a good segue to the next slide. We hope you will save the date for ATEC's long-range plan update on March 19, 2024. We plan to host an in-person event in New York City, which will be webcasted for those who cannot attend. The update will add two years to the long-range plan that we shared last year, which went out to 2025. We recognize that plan is becoming increasingly stale due to strong business performance. We'll share more about the event as we finalize details, but rest assured our intent is to be increasingly profitable business funding growth with free cash flow will be clear. We hope you will plan to join us. Now in closing, I'd like to sincerely thank you for your continued support. This was an eventful quarter. Exceptional business momentum drove both revenue and adjusted EBITDA outperformance, a continued testament to our belief that good surgery is good business. Our capital raise will enable us to exploit unprecedented industry disruption. and we have begun to onboard new sales professionals and arm them with the revenue-generating assets they need to truly hit the ground running. The market share expansion that we expect to unfold will be very sticky and will power long-term profitable growth in the years to come. We have an active IR calendar over the next few months, and I hope to connect with many of you in person. With that, I'll turn the call back to Pat.